Europe's leaders to tackle growth at summit

By SARAH DiLORENZO | May 23, 2012 | 8:39 AM EDT

A euro logo is seen that reads in Danish: 'The head of the EU', referring to the Danish EU presidency, at the European Council building in Brussels, Tuesday, May 22, 2012. At Wednesday's informal meeting of the EU's 27 leaders in Brussels, newly elected French President Francois Hollande is expected to push for so-called eurobonds, which can be used to fund investments or boost banks' capital reserves. (AP Photo/Yves Logghe)

PARIS (AP) — The leaders of the 27 countries that make up the European Union are to meet in Brussels on Wednesday to try and find a way to keep the debt crisis in Europe from spiraling out of control and promote jobs and growth.

On Tuesday the Organization for Economic Cooperation and Development warned that the 17 countries that use the euro risk falling into a "severe recession." It called on governments and Europe's central bank to act quickly to keep the slowdown from dragging down the global economy.

The electoral turmoil in Greece threatens to pull apart the eurozone. Borrowing costs are up for the most indebted governments. There is an increasing number of reports of worried savers and investors pulling funds out of banks that are seen as weak. Meanwhile, unemployment is soaring as recession grips nearly half the eurozone countries.

However, switching the conversation from slashing budgets to promoting growth won't be easy. And actually producing growth will be even harder.

WHAT'S ON THE AGENDA

For the past few years, fiscal austerity was all anyone ever talked about in Europe. That had a certain logic since governments were facing rising borrowing costs on bond markets, a sign investors are nervous about the size of their ballooning deficits. Austerity was intended to address this nervousness by reducing a government's borrowing needs. For the people of Europe, austerity meant layoffs and pay cuts for state workers, scaled-back spending on welfare and social programs, and higher taxes and fees to boost government revenue.

At the height of the debt crisis last winter, the eurozone — led by Germany's Chancellor Angela Merkel — proposed a so-called "fiscal pact" that would tie member countries to strict fiscal and deficit targets.

As a way out of this problem, economists and politicians have called for measures that would help a country's economy grow. France's new Socialist President, Francois Hollande, has led the charge, insisting during his campaign that he would not sign Europe's fiscal pact until it includes measures to promote growth.

Economists recommend pro-growth measures including reducing red tape for small businesses, making it easier for workers to find jobs across the eurozone and breaking down barriers that countries have created to protect their own industries. Some economists go a step further and say governments should actually increase spending while economies are so weak — and make reining in deficits a longer-term goal

However the question of how to produce growth for Europe is a sticky one. Germany, which led the push for austerity, insists that growth will be the product of tough reforms, like ones it undertook to liberalize its economy over a decade ago. Others say such reforms will take a while to bear fruit and more needs to be done right now — such as extending the deadline for deficit targets and waving through wage increases.

HOW DO YOU PROMOTE GROWTH?

Leaders at Wednesday's summit — like the heads of the world's leading economies at the G-8 meeting at Camp David last weekend — are expected to tread a fine line between talking about ways to promote growth and sticking to commitments to balancing budgets.

So where will the money to boost growth come from? One area could be the better use of the resources already at the European Union's disposal. The EU has a pot of so-called "structural funds", many of which are going unused even though several countries are in desperate need of cash. Putting those to use will be one topic Wednesday. Countries are also expected to discuss increasing the size of the European Investment Bank so that it can, in turn, lend more money to struggling small businesses.

Diplomats have already agreed to issue EU "project bonds" — debt issued jointly by the union — which can be used to fund major infrastructure projects. Hollande campaigned strongly on this idea, and even Germany, which was initially opposed to any jointly held debt, has softened its position. However, only a pilot phase of the project has been approved.

WHAT'S LIKELY TO BE CONTENTIOUS

The idea of project bonds are seen by many politicians and economists as a step towards so-called "eurobonds" — jointly issued bonds that could be used to fund anything and could eventually replace an individual country's debt. Eurobonds would protect weaker countries, like Spain and Italy, by insulating them from the high interest rates they now face when they raise money on bond markets. Those high interest rates are ground zero of the crisis: They forced Greece, Ireland and Portugal to seek bailouts.

EU President Herman Van Rompuy has encouraged participants on Wednesday to discuss "innovative, or even controversial, ideas." He has suggested that nothing should be taboo and that long-term solutions should be looked at. That seems to point to a conversation about eurobonds.

But Germany is still staunchly opposed to such as measure. On Tuesday, a senior German official stressed that despite the pressure from some other European countries, Merkel's government has not eased its opposition.

"You can wake me up in the middle of the night, at 3 a.m., and then I will tell you what our position is — also at 5 a.m., it doesn't matter. We think that eurobonds are not the right path for many reasons and in our opinion they cannot be part of a growth strategy," said the official, who briefed reporters on condition of anonymity in line with government policy.

What was needed instead, the official insisted, was work to eliminate the underlying problems by trimming the nations' high debt burden and restoring their competitiveness through structural reforms.

WILL ANY OF THE SOLUTIONS WORK?

The problem with many of the solutions on the table is that even if they are all implemented, they would likely take years to yield growth. And Europe needs faster answers.

To that end, many economists are pushing for a larger role for the European Central Bank — the only institution powerful enough to have an immediate impact on the crisis. If Europe's central monetary authority was given the power to buy up a country's bonds, that government's borrowing rates would be pushed down to more manageable levels.

"In the immediate future, the ECB will remain the only institution with the resources, speed of action, and policy instruments necessary to shore up confidence in the single currency area, a role we expect it will play, should conditions necessitate," a Eurasia Group note said Tuesday.

Another problem is that a surge in popularity of anti-bailout parties in Greece may force European leaders to reconsider their commitment to austerity very quickly. Expectations are that a new Greek government after June 17 elections could seek to renege on the country's austerity program. Greece's bailout creditors in the eurozone would then have to decide whether they are willing to ease austerity to favor growth. If they do not and cut Greece off from aid, the country would default and likely have to leave the euro.

Germany's central bank said Wednesday that the eurozone would be able to cope with Greece failing to implement austerity. But many analysts say that could just be fighting talk to persuade Greece to stay with the austerity and in the euro, as a breakup of the currency union would be devastating for the country and destabilize the rest of the continent.

WHY IT MATTERS

Taken together, the European Union is the world's largest economy. If it isn't growing, that weighs on everyone else. A lack of growth is also hurting the continent's efforts to rein in deficits and cut debts. When growth slows, so does tax revenue. That makes it harder for a government to balance their books — which can mean they have to make even deeper cuts. But the cuts themselves eat into growth: when government jobs and state investment projects are slashed, people have less money in their pockets to spend.

Breaking that cycle will be key to getting European economies growing again.